Personal loan balance transfer: How it works and when to consider it | Mint

During a medical or any other emergency, an individual may take a personal loan from the first lender willing to approve and disburse the funds. However, once the emergency is taken care of, the individual may realise that the personal loan which they have taken has come at a higher interest rate than required.

In such a scenario, the individual can switch to another lender with a lower interest rate through a personal loan balance transfer. In this article, we will understand what a personal loan balance transfer is, its benefits, factors to consider, and how it works.

What is a personal loan balance transfer?

A personal loan balance transfer is the process of shifting/transferring the outstanding amount on an existing personal loan from one financial institution to another. It is primarily done to benefit from the lower interest rate and other benefits being offered by the other lender. A lower interest rate translates into a lower interest amount outgo, thus improving the borrower’s financial situation.

For example, Babita took a three-year personal loan from ABC NBFC at an interest rate of 18% p.a. After one year, Babita got an offer from XYZ Bank to transfer her personal loan at an interest rate of 12% p.a. Thus, by doing a personal loan balance transfer from ABC NBFC to XYZ Bank, Babita will benefit from the interest rate reduction, after factoring the transfer fees, if any.

A personal loan balance transfer is also known as loan takeover or refinancing.

What are the benefits of a personal loan balance transfer?

A personal loan balance transfer has several benefits. Some of these include the following.

Interest savings

In the case of most borrowers, the biggest and foremost reason for a personal loan balance transfer is the savings on interest paid. If there is a substantial difference between the interest rates of the two financial institutions, it will result in meaningful savings for the borrower. The savings in the interest paid frees up cash flow for other savings, investments, or expenses.

Longer tenure

Some financial institutions where the personal loan is being transferred may change the loan repayment structure such that it benefits the borrower. The financial institution may give a longer repayment tenure, resulting in lower EMIs. The lower EMIs are easy on the borrower’s pocket. The cash flow freed up from the difference in the personal loan EMIs of the two financial institutions can be used for investing towards financial goals.

Higher loan amount

Some financial institutions where the personal loan is being transferred may offer an additional amount. It may be offered in the form of a higher amount of personal loan or in the form of a top-up loan. The top-up loan may be offered later after evaluating the satisfactory performance of the new loan. The additional loan amount or top-up amount can be used for debt consolidation. You can use it to pay any other outstanding loans and/or credit card balances, and have one consolidated EMI.

Customer service

Some individuals may not be satisfied with the customer service of the existing financial institution. In such cases, the personal loan balance transfer may lead to better customer service from the financial institution where the personal loan is being transferred.

In most cases, bad customer service will not be the primary reason for the personal loan balance transfer from the existing financial institution. Better customer service from the other financial institution will be a secondary benefit over and above the primary benefits of interest savings, longer tenure, or a top-up loan.

Points to consider while evaluating a personal loan balance transfer

For most borrowers, the biggest factor to consider for a personal loan balance transfer is the cost/fees involved. There will be primarily two things that the borrower will have to consider.

Foreclosure fee

The financial organisation from where the personal loan is being transferred will charge a foreclosure fee. While there is a foreclosure fee in the case of most personal loans, in some cases, it will not be there or is waived under some offer. Check whether there is a foreclosure fee and how much it is. The foreclosure fee is usually a percentage of the outstanding principal.

To know about the foreclosure fee, you can check the personal loan agreement, visit the financial institution branch or talk to their customer care.

Processing fee

The financial organisation where the personal loan is being transferred will charge a processing fee. The processing fee is usually a percentage of the loan amount or a flat fee. Some financial institutions charge a processing fee as a percentage of the loan amount, subject to a minimum amount, whichever is higher. Check whether the financial institution where the personal loan is being transferred offers a discount on the processing fee or a complete waiver.

Add up the foreclosure fee and the processing fee. Now compare the total of the two with the savings in the interest amount from the loan transfer. If the savings are meaningful or substantially higher after considering the fees, it makes sense to go for the personal loan balance transfer. If there are no savings or they are not meaningful, the loan transfer will not make financial sense and may be dropped.

Eligibility for personal loan balance transfer

The borrower must fulfil the eligibility criteria set by the financial institution where the personal loan is being transferred. Usually, the loan transfer eligibility criteria include the following.

1. A good repayment track record of the existing personal loan
2. A good credit score (usually, a credit score of 750 or above is considered good for approving loan applications)
3. A stable job/profession with a regular income source. Some financial institutions specify a minimum monthly income
4. The borrower’s age must be within the minimum and maximum age criteria
5. A minimum outstanding personal loan amount with the existing financial institution

How does personal loan balance transfer work?

You must first finalise the bank where you want to do a personal loan balance transfer. Get in touch with them and check their eligibility criteria. If you fulfil the eligibility criteria, you can make a personal loan balance transfer application. The bank will get in touch to fill out the form and complete the documentation and the other formalities.

The application will be put through the credit underwriting process. Once approved, you will need to complete the remaining formalities, after which the loan amount will be disbursed. The loan amount will be paid to the other bank to foreclose your existing personal loan. You will then start paying the regular monthly EMI on the new personal loan.

Should a borrower go for a personal loan balance transfer?

A personal loan balance transfer can offer several benefits like interest savings, longer tenure, a top-up loan, better customer service, etc. So, should a borrower go for a personal loan balance transfer? The answer will depend on the net interest savings after considering the foreclosure charges of the earlier loan and the processing fees for the new personal loan. If the net interest savings are meaningful or substantial, the borrower may go for a personal loan balance transfer.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.